You are a registered tax practitioner, and a potential new client (Kenny Ridge) visited you to assist with his tax affairs. After drawing up an engagement letter setting out all the disclaimers, signed by you and Kenny Ridge, you start gathering all the information relevant to his tax affairs. Background information/Notes Kenny is 60 years old and a retired lecturer, who previously taught sculpture at a private college. 1. Before retiring, Kenny was known in the art community but did not create sculptures for exhibitions. A friend recommended that he make sculptures for a solo exhibition. The exhibition was a huge success, with all the artworks sold on the opening night of the exhibition. 2. In his spare time, Kenny mastered the art of painting using various techniques and materials. However, he did not think that his work was of an acceptable standard to sell publicly or through art galleries. 3. Because he did not earn much money as a lecturer, he could not always buy art with a high investment potential. However, he purchased works from his students, whom he believed would become famous one day. He also regularly attended auctions, seeking bargains. Over the years, he gradually built up a substantial private collection. 4. During the previous year of assessment, he inherited a painting by Peer Nephew, a renowned deceased South African artist. Despite the painting’s value, Kenny did not like it. By word of mouth, he got an offer that he could not refuse of R750 000. The painting was not subject to estate duty or any CGT because it was a personal use asset. (However, the valuation of the painting at the date of death was R500 000). 5. After retiring, Kenny was offered a managerial position at the Ever-Reddy Galley, a well-known South African art gallery. He knew this offer was probably based on the success of his pre-retirement solo exhibition. 6. He accepted the job on the condition that he would receive artwork as compensation rather than a cash salary. He will also secure the right to buy art at a cost price. Furthermore, the gallery will not charge a commission on selling any of his private collections. 7. The gallery curator saw his paintings and convinced him to make the gallery the sole distributor of his paintings. CONFIDENTIAL TAX4863 Oct/Nov 2024 Page 4 of 5 The following events or transactions happened during the year of assessment ending on 29 February 2024. Salary Instead of cash, he received one sculpture with a value of R250 000, one painting with a value of R100 000, and three pieces of ceramics (pottery) with a value of R90 000. Solo Exhibition The proceeds of the solo exhibition he held before retirement were R450 000. Paintings on consignment (The artist only receives the money after the artwork is sold) The paintings, excluding commission and VAT, are priced at R800 000 by the gallery. One painting was sold on 21 February 2024 for R280 000. He only received the cash on 5 March 2024. Private sales during the year of assessment Sale 1: On 5 May 2023, he sold a sculpture that he had bought from a student for R1 000 for R120 000. He held the sculpture for 20 years. Sale 2: On 30 November 2023, he sold the Peer Nephew painting he inherited for R750 000. Sale 3: He sold a painting he bought at an auction for R43 000 for R950 000. He held the painting for three years. Sale 4: He sold the three pieces of ceramic for R150 000 (The three pieces he received instead of a salary) According to Kenny he had to sell the artworks because he needed money to pay his wife's hospital bill. REQUIRED Kenny requests your opinion on the tax treatment of the transactions and events for the year of assessment ending 29 February 2024. However, he wants you to also comment on the worst-case scenario, if applicable. In your report you will refer to legislation and case law. You decided to write two reports in order to deal with the sales of the artworks separately. 1 Draft a report where you deal with the normal tax consequences of • The salary he earned. • The proceeds of the solo exhibition; and • The issue of his paintings on consignment. 2 Draft a report on the normal tax consequences of the sale of his artworks.

### Report 1: Normal Tax Consequences #### Salary Earned Kenny received non-cash compensation in the form of artworks valued at R440,000 (R250,000 for the sculpture, R100,000 for the painting, and R90,000 for ceramics). According to Section 8C of the Income Tax Act, non-cash benefits are taxable as income. Therefore, the total value of R440,000 should be included in his gross income for the year of assessment ending 29 February 2024. #### Proceeds of the Solo Exhibition The R450,000 earned from the solo exhibition before retirement is considered taxable income. Since Kenny was not in the business of selling art at the time, this could be treated as a capital gain. However, given the commercial nature of the exhibition, it is more likely to be classified as income from a trade or profession, thus subject to normal tax rates. #### Paintings on Consignment The painting sold for R280,000 on 21 February 2024, but Kenny received the payment on 5 March 2024. Under the accrual basis of accounting, income is recognized when earned, not when received. Therefore, the R280,000 should be included in his income for the 2024 tax year. The remaining unsold paintings valued at R520,000 (R800,000 total less R280,000 sold) will not be taxed until sold. ### Report 2:

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